The Difference Between Public and Private Debt

What’s the difference between public and private debt?

Private debt

Private debt is the debt accumulated by individuals or private businesses. Private debt can take numerous forms; a personal loan, credit card, corporate bond or business loan for instance.

Private debt comes with numerous pitfalls and risks for the applicant. When a loan is provided by family or friends, missed repayments can cause tension and even result in the end ofrelationship. Debt incurred with a credit provider may result in high levels of interest, charges for missed payments or demands for security.

Credit providers may ask for security over an asset or in the form of a guarantee in return for a secured loan. If security is given, the borrower can risk their home if they can't make repayment of their debts.

The risk of private debt doesn’t only lie with the debtor. The creditor risks non-repayment of funds or the need to issue lengthy and costly legal proceedings when they agree to make a loan. If a company goes into liquidation or a person enters bankruptcy, a creditor will lose all of the majority of their investment.

Public debt

Public debt, or national debt, is the sum of the financial obligations incurred by all government bodies of a county. This debt can be accumulated by the government directly or a government agency at any level.

Pubic debt can arise from a number of sources, for example government bonds create a debt owed by the government to a member of the public. Alternatively, Sovereign Debt is accumulated when the government of a county borrows money from the government of another.

The public technically owns the debt. However, the debt will be viewed by the rest of the world as linked to the country as whole. The choice to create public debt is ultimately not that of its owner, and is entered into by a few but paid for by many.